How to benefit from this Mega Trend starting 28th Aug

(Aug 27, 2014)

In this issue:
» Can PPF returns beat Sensex over a 20 year period?
» Report card of Dr Rajan's one year tenure...
» Impact of Fed rate hike on Indian markets
» Will 2014 be the best year for markets since the last 5 years?
» ...and more!

But what exactly are Mega Trends, you may ask? And how can you benefit out of it?

In simple words, Mega Trend is a policy overhaul or change in business landscape that could act as a huge tailwind for any company to capitalize on. It is a vital cog in a company's future strategy, development and innovation process. Take the case of National Telecom Policy of 1994 for instance. We saw how the policy liberalized the sector and created the Bhartis and the Ideas of the telecom world. Now, investors who have the knack of spotting such trends in advance could virtually end up with a pot of gold.

One such Mega Trend that we see unfolding in India over the next decade is a huge jump in household savings and investments. And the key inflection point will be rapid financial inclusion. Given that one third of the country's population does not have a bank account, financial inclusion will be best way to leapfrog savings and financial investment targets. The newly envisaged, Jan Dhan Yojana, if executed well, seems to be the most promising indicator of this.

It is an ambitious financial inclusion scheme whereby the government intends to provide every household with a bank account and insurance cover. It is expected to go on the floor from tomorrow i.e. 28th Aug 2014. This will further lay ground to offer various banking and pension products to the poor and marginalized.

The biggest impact of this financial inclusion program will be that the poor people will come out of the grip of moneylenders. Currently, they pay exorbitant rates when in need of money. Access to credit facilities from banks would mean they would no longer be buried in the interest rate cycle. Also, banking facilities would enable smooth transition to direct cash transfer. This would eliminate pilferages that happen in subsidy transfers.

While the Jan Dhan Yojana has PM's stamp on it lowering the execution risk, challenges are galore. Illiteracy and huge unbanked population makes the task difficult if not impossible. Nonetheless, we reckon this was a step in the right direction. If the benefits of formal banking system reach poor, it would be a true sign of economic growth.

So, how can you as an investor benefit out of this Mega Trend?

Well, if financial inclusion happens to be a reality, huge savings pool of rural India will be channelized into the banking sector. This will enable banks to shore up their low cost CASA base. Micro lending will age out as formal banking facilities will be available. In a nut shell, small and medium sized banks have a huge opportunity on their plate. Banks with good asset quality, history of strong branch expansion, clean management and low NPAs can be huge wealth creators for investors.

It is quite apparent that banking will be the beneficiary of this financial inclusion drive. You would have guessed this quite earlier. However, various other benefits can emerge from this drive. For one, it can curb the menace of ponzi schemes as public savings will be channelized into legal channels. Cash transactions will reduce so the problem of black money will be resolved to an extent. It shall also reduce poverty to some extent as people will no longer fall into the debt traps of money lenders.

As can be seen, this Mega Trend can eliminate social evil and also benefit investors. Rest assured, we are on our toes and are already screening banking candidates that can benefit out of this Mega Trend. You will probably hear from us in this regard very soon. Until then, stay tuned until we reveal the next Mega Trend with a huge money making opportunity.

--- Advertisement ---
Treasures can still be found today...if you know where to look!

Imagine you discovered a bag of very old gold coins in your backyard garden, or from an old chest in the attic that belonged to your great grandfather...

What would you do? Would you rush to advertise your discovery to everyone?

Surely not! No one would do that.

You would instead try to figure out how to leverage on them. How best you can use the gold coins to make you rich quietly, without much ado!

A similar situation has emerged here...

We have discovered some such treasures after years and years of research. I am talking about some unknown companies that could deliver double or triple digit returns. And sometimes, probably even more!

But you need to act fast because if more people find out about them, the profit opportunity could shrink.

The share markets are like a sensitive barometer reflecting the mood of the economy. Therefore Mega Trends, that simplify regulatory hurdles and boost economic growth, have a favourable impact on the stock markets. Since the beginning of 2014, the stock markets have been on an uptrend. The rally received a leg-up by the election of a strong, reform-led government at the Centre. Foreign Institutional Investors (FIIs) have played a pivotal role in driving up markets with investments close to US$ 12.6 bn made so far. But one cannot deny concerns of pull-back in global liquidity hitting domestic equity markets.

However, the redeeming factor is that domestic institutional investors have turned net buyers in the stock markets on improving economic fundamentals. Industrial output grew by 3.9% during the period April-June 2014 as compared to a one percent contraction in the corresponding year-ago period. Even the Reserve Bank of India expects the economy to grow by over 5% in FY15 on improvement in manufacturing, pick-up in investments, better external demand and stabilizing global commodity markets. Also softening crude prices are expected to minimize current account deficit translating into better government finances for development plans.

The BSE-Sensex has yielded returns of 25% till date. But with improving economic outlook and entry of retail investors, the stock market returns are expected to move up further. A report by Deutsche Bank has claimed a Sensex target of 28,000 by the end of December 2014. The resulting Sensex gain of over 32% for 2014 may well make equity investors jump in glee after the big recovery party in 2009.

Are stocks headed for a new high in 2014?

* Year to date

03:15

When Dr Raghuram Rajan took over as the governor of the RBI from Dr Subbarao, we told you how he had big shoes to fill. Having spent one year in office, the economist turned central banker has not done a bad job. He has certainly not played to the gallery by letting interest rates fall as per the government's wish. Like his predecessor he has maintained that stimulating growth cannot be the RBI's sole responsibility. Also the data on inflation, currency rates and forex reserves support the fact that he has done the needful to make India more resilient. More importantly, instead of waiting for cues from the US Fed, he has sent out a warning to them. Citing the risk and impact of easy money policies on the emerging economies, Dr Rajan has predicted the possible dangerous outcome. However, what cannot be denied is that so far Dr Rajan's tenure has been sweetened and supported by investment buoyancy. That too one backed by election results and sentiments rather than economic fundamentals. Hence he is yet to go through the phase of crises and prove himself the way Dr Subbarao did. The management and ethics in PSU banks too need his urgent attention. Nevertheless, we believe that so far Dr Rajan has upheld the values and conservativeness we expect from the RBI. And going forward he is well placed to ensure that the banking system emerges from the NPA crisis and supports the economic revival.

03:45

Fixed income instruments or stocks? Which one do you think gives a better return over the long term? If it's a period of say 1-3 years and even 5 years in some cases, there's a chance that the fixed income portfolio could end up beating the Sensex. This is more likely when investments are made at expensive valuations. However, when it comes to a 10 year period, it is the index that's near certain to win isn't it? We definitely thought so. However, a headline in a leading daily made us sweat for a while when we read that even over a period of 20 years, it is the PPF investments that beat the returns generated by the Sensex! And statistically there didn't seem to be any error in the claims made. With returns of 10.46% compounded, the PPF investment did indeed beat the Sensex which ended up giving 9.15%.

However, so happy did the author seem to have turned over his discovery that he perhaps forgot to verify a very important point. Apparently, his calculation does not take dividends into account. Therefore, if you add another 1.5%-2% per annum by way of dividends, it is indeed the index that has come out ahead. Also, worth adding that the valuations that the Sensex was trading at around 20 years back was perhaps at its most expensive. And it seldom reached those valuations again over the next two decades. The fact that the index has beaten PPF investments over a 20 year period even when it was at its most expensive does point to the superiority of stock market investing over any fixed income instrument. And this is what investors should never forget according to us.

04:10

There have been increasing talks of late that the US Fed will be hiking interest rates. Now, because of the massive dose of liquidity in a near zero interest rate regime, most of this money had found its way into asset classes in the emerging markets. This is because the latter were offering better yields. So, there are concerns that once the US raises interest rates, all of this money will leave emerging countries including India. This would then lead to a collapse in asset prices in these regions. This bound to pose significant risks for emerging countries and the RBI governor Mr Rajan has been quite vocal about this. But is an interest rate hike in the US a real threat? As per an article in the Mint, several cases have been cited when higher yields in the US have not in any way impacted the returns in emerging countries. Then there is the big question of whether a rate hike will actually take place? Assuming that the US does recover, it can largely be attributed to the Fed's loose monetary policies in play. So if these are withdrawn, there is every likelihood that the US could slip into the doldrums again. The problem is that the Fed's policies have distorted the global markets so much that there is no definite answer as to how the scenario will pan out.

04:25

After opening in the positive, the Indian stock markets have managed to hold on to their gains. At the time of writing, the BSE-Sensex was trading up by 126 points (0.5%). Majority of the sectoral indices were trading in positive territory led by consumer durables and IT stocks. Most of the Asian markets were trading in the green with Singapore and China among the gainers. European markets have opened the day on a mixed note.

04:55

Today's investing mantra

"Wide diversification is only required when investors do not understand what they are doing" - Warren Buffett

3 Responses to "How to benefit from this Mega Trend starting 28th Aug"

BKUMAR

Oct 6, 2014

do you think this dump of your cut past system generate report going to be reads by subscribers. No not at all please send summarize points and investors beneficial report which really effective. all govt policy and other report we get updated from news channel and business mega zine. your reports means just wasting time on Blaa Blaaaaaaa...

You are very right about the Financial Includion and getting the marginalised people out of the grip of money lenders. I got my driver's bank account opened about 18 months ago and credit his salary on 1st of the month thru Auto-debit. Since then he has stopped asking me for advance salary and saves a part of his salary in his bank account.

If market was at peak 20 yrs before?
PPF v/s Equity article//
this lead us to thought like every year we should comit to equity SIP way. then these annual veriation will be accounted. but point is we investor become active when market rises like this year. we missed investment last 2 yrs as mkt wa down.
How we can strategise?
if somebody invested 1 lakh every year in ppf and equity..how returns compare?
thx.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.